Following the numerous base rate cuts over recent months, many borrowers have seen their mortgage repayments fall sharply.  As a result a number of banks have reported that there has been an increase in the number of homeowners that are overpaying on their mortgages each month as a means of saving money.

Borrowers will find that by keeping their repayments the same even though interest rates have dropped they could cut years from their mortgage term and could also save thousands of pounds in interest over the term of the loan. Industry officials are advising consumers to overpay wherever possible to save them money and get out of debt more quickly.

As an example, a homeowner on a lifetime tracker mortgage paying around £1,000 per month a few months ago would have seen their minimum payment drop to £690 now. If rates stay at their historic low and the homeowner continued paying £1,000 per month, they could expect to save £16,000 over the term and pay off their mortgage nine years early!

The simple truth is that the cost of debt is normally much higher than the interest on savings. The exceptions are where there are penalties for clearing the debt or where the debt is exceptionally cheap for introductory purposes or other reasons.

Assuming you have various debts it’s common sense that you should pay off the most expensive ones first. As mortgages are normally cheaper than credit cards or loans, you should focus on paying the latter off first. One exception, however, is official loans from the Student Loans Company where the interest rate is significantly lower than elsewhere.

Once these more expensive debts have been repaid, now is the time to consider paying off your mortgage by diverting regular savings from elsewhere. In essence if your mortgage rate is higher than the net of tax savings rate you should look to start making additional payments towards your mortgage.

To illustrate this, if you had a £10,000 mortgage debt at 5%, your annual interest cost per annum would be £500. However, if you had savings of £10,000 receiving say 3% after tax you would be receiving £300 interest per annum. Diverting your £10,000 savings to repay part of your mortgage would save you £200 per annum!

However, before taking this course of action there are a couple of things to check first:

• If you are in a position to overpay your mortgage you need to check what your lender will allow you to do. Each lender will have different rules so check the small print first. For example some may let you overpay a maximum amount per month or a percentage of the capital borrowed per month or per year.
• Don’t divert too much towards your mortgage leaving you with no readily available cash for emergencies etc

If this all appears relevant to yourself give it some serious consideration and it may provide you with a great solution if you are looking for ways on how to save money in this climate.

Mortgage advice

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With reports of annual falls in property values of around 16% it doesn’t seem like using the words “dips” is quite right. Well, maybe, but like a lot of things you’ve got to put things in context. According to the Council of Mortgage Lenders (which all the main lending companies are members of) over two thirds of borrowers with negative equity have negative equity of £8,000 or less. And, unlike the last major episode of negative equity in the early 1990s it’s spread fairly evenly amongst borrowers and isn’t a first time buyer problem.

If we add in the upturn in mortgage enquiries and falling inter bank lending rates – a first sign that lenders might lend again soon- the overall picture should be that negative equity won’t spiral out of control, or may largely disappear as confidence returns to the housing market and prices get nudged upwards.

One of the slightly odd things about negative equity is that because valuing your home isn’t an exact science you may not know that you’re in negative equity. This isn’t all bad, because one of the best things to do is nothing! Having negative equity isn’t like an unauthorised bank overdraft; your lender isn’t going to start making threatening noises about repaying it. If you’re not having any problems in paying your mortgage or don’t plan to move house you’re fine. Keep saving money, over pay the mortgage if possible, and sit tight.

Even if you do need to move house the CML have said that its members will try to be helpful if you have a good track record of keeping up with your payments and the negative equity isn’t too substantial. Our tip for how to save time and effort in finding out your options is that you go to your existing lender – they may give you a sympathetic hearing.

If you are having problems in repaying your mortgage – and there’s no evidence that there’s a link between this and negative equity – make sure that you speak to your lender as soon as possible.

Lastly, just to keep things in perspective, there’s £2.1 trillion of unmortgaged equity in UK homes – that’s still an awful lot of money!

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Why we have fees is really a different discussion, but it’s probably partly down to too many lenders coming into the market and then having to prop up falling margins with ever more exotic ways of earning money from you the borrower. And, partly the fact that a fee helps keep the headline rate of a mortgage down, so that a lender can look better in best deals tables.

So, what are the main fees that you might have to pay to the lender today? These are an arrangement fee, an early repayment fee and an exit fee.

The arrangement fee is simply the lender’s charge to you for doing business with them.

An early repayment fee is the charge which the lender will levy against you if you want to pay off your mortgage early. Basically it covers the lender for their lost profits from not lending the money to you for as long as had originally been agreed.

The exit fee is the most controversial of the three fees because it’s the fee for doing the admin when the mortgage comes to the end of the agreed period. You might expect the lender to have thought that the mortgage would have to end at some point, and that they would take that into account when setting the mortgage up, wouldn’t you? Well not only do some lenders make a charge, but they’ve been upping the charge, often without telling the borrower, during the course of the loan, so much so that the regulator said “enough” in 2007 and told lenders to justify their charges (a bit like unauthorised overdraft charges).

As we’ve said already, charging fees is one way to keep the headline rate of a mortgage down. If you’re comparing like with like it shouldn’t be too hard to work out what’s the best deal for you is to help saving money. But not all lenders charge all of the fees, so you might have to get your calculator out to work out whether it’s better to pay a higher headline rate and make up for that with lower fees. You’ll also have to have a stab at how likely you are to want to move your mortgage before it comes to the end of its term and see which lenders offer the best deals.

To sum up with a savings tip – don’t be dazzled by a low rate and ask tough questions about fees.

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Mortgage exit administration fees (MEAFs) – or mortgage exit fees for short – are charged by lenders when you change mortgage contract. If, for example, you switch providers at the end of a fixed-rate period, or you pay off your mortgage, you’ll probably have to pay an exit fee. According to lenders, exit fees cover the costs of things like releasing the deeds to your house.

Exit fees are different from early repayment charges, which you’re landed with if you pay off your mortgage before the end of a set period.
Unexpected increases in exit fees

Fees to exit your mortgage should be proportionate to the real admin costs.

Some lenders have been increasing exit fees on existing mortgages – so you may be charged more when you exit the mortgage than it showed in the contract at the time you signed it.

If you think that isn’t fair, you’re not alone. The Financial Services Authority (FSA) concluded in June 2006 that some lenders might have increased their fees unjustifiably. It then launched an investigation into the increases of exit fees and whether they complied with the Unfair Terms in Consumer Contracts Regulations 1999 (UTCC).
Fair fees

The FSA has said that mortgage lenders should charge customers either no fee, or the original fee in the contract. If they want to charge a higher fee, they need to justify it.

Changes in costs associated with deed release fees, Land Registry charges, staff processing and a reasonable proportion of general overheads can all be included in a fee increase, but the FSA has been clear that other costs, such as marketing, loss of profit on lending or costs of arranging or running the mortgage, cannot.
Challenge your lender

If you’ve paid a fee in the last six years that was higher than the original fee in your mortgage contract, we think you should challenge your mortgage lender.

As with unfair bank charges, we also believe that if the fee was disproportionate to the real costs of administration of the exit from the mortgage then you should challenge it, even if it had not risen since the original contract.

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One tempting solution is to use a bridging loan, where a bank lends you money to buy the new house before the old one is sold. This is a fairly obscure type of finance, but it seems to be getting a bit of publicity and is likely to get more as the property market remains stagnant and sellers get ever-more desperate.

Bridging loans have traditionally been rather expensive, but the Bank of England’s rate cuts have brought them down to levels where many people might be tempted: 1%-2% over base rate plus a 0.5%-1% arrangement fee, according to Lloyds TSB, which seems to be the cheapest on the market. RBS also offers them, but few other high-street banks and mortgage advisers are keen. Specialist bridging finance firms, serving both commercial and private borrowers, have sprung up, but tend to be very expensive – in the region of 1% a month, plus fees.

Strictly speaking, there are two types of bridging loan. Closed bridging is used when you’ve already exchanged contracts, but are unable to complete both the sale and the purchase on the same day, leaving you with a financing gap of a few days. This type of finance can be useful: if you’re dealing with a long chain it can be impossible to get everyone to complete on the same day, and if one or two buyers agree to bridge, it can split the chain into manageable chunks. Here you’re borrowing for a short, fixed period, so your risks will be limited and a bridging loan may be a reasonable option (but do talk it through carefully with your mortgage adviser first).

The other type of loan, which would be of more use to someone struggling to sell their first property, is open-ended bridging (OEB). While it may look attractive as a way to end your frustration at not being able to sell, we’d advise against it. OEB is much more dangerous. Here, you take out a loan to buy the second home without having exchanged contracts to sell the first. Clearly, this is extremely risky: you’ve an open-ended commitment to pay mortgages on two properties, with no certainty as to when you’ll be able to sell your first house and pay off one of the mortgages. This applies even if you have a buyer lined up; up until the point when they exchange contracts, they can – and frequently do – walk away.

You may well struggle to sell your property – if you couldn’t do it before taking out a bridging loan, why would it be easier afterwards? You’re doubling your exposure to a property market that is nowhere near hitting bottom, and could end up in negative equity on both houses. And if interest rates start rising again before you sell, you’ll have two sets of rising payments – so what seems affordable now may quickly become a burden.

Here’s a better idea: don’t buy another house. If you need to move out of your current home to get more space, for example, then rent. There’s plenty of room for house prices to fall much further. Wait long enough and you might find you can purchase a lot more ‘dream home’ for your money – and all without the stress of carrying two mortgages.
A week in the property market

• House prices fell a further 2.3% in February, according to the Halifax house price index. This means house prices have fallen 17.7% over the past year, leaving the average house price at £160,327, compared to £194,953 in February 2008. House prices are now at the same level as in August 2004.

• Property firm Savills made a £7.7m loss last year, compared to a profit of £85.9m in 2007. It blamed the “unprecedented” downturn in the housing market for its reversal of fortune.

• Royal Bank of Scotland has pledged to issue £1.7bn worth of mortgages into the Scottish housing market over the next year. The bank said it would offer customers mortgages worth up to 90% of a property’s value in order to help first-time buyers get on to the property ladder. “Our message to customers in Scotland is very clear, we are now, more than ever, open for mortgage business,” Paul Geddes, head of consumer banking at RBS Group, told the BBC.

• Property sales sank to a new low in February, according to the Royal Institution of Chartered Surveyors (RICS). The average estate agent agreed just 9.5 sales in the three months to the end of February. That’s the lowest since the RICS survey began in 1978. However, the survey reported that inquiries from new buyers increased for the fourth month in a row. “Potential buyers continue to come through estate agency doors, but without mortgage finance, transaction levels are likely to remain close to all-time lows,” said RICS spokesperson Jeremy Leaf.

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